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Far more companies in Britain’s services sector are raising prices than cutting them, new data showed on Friday, stoking worries that inflation remains more persistent than the Bank of England had hoped.
A day after the BoE raised interest rates 0.5 percentage points in a bid to stop a wage-price spiral, the Flash S&P Global/Cips UK PMI index highlighted the increased costs that companies are still passing on to customers.
The survey showed 25 per cent of services companies raised prices in June compared with only 4 per cent that cut them.
Paul Dales, at Capital Economics said the data “suggests that [the BoE’s] interest rate rise to 5 per cent won’t be the last”.
Based on interviews collected between June 12 and 21 for the PMI survey, about 40 per cent of services businesses reported their costs had risen, driven by higher wages. The sector also reported the fastest pace of hiring since September.
Thomas Pugh, economist at consulting firm RSM UK, said the figures would concern the BoE’s rate-setters, “who have explicitly tied further interest rate rises to the strength of the labour market”.
Underlying price pressures in the services sector — the pillar of the British economy — were one of the main reasons behind the BoE’s surprise decision this week.
But the bank’s effort to damp demand was complicated by the announcement on Friday of further public sector strikes. With wage pressures continuing to build across the economy, junior doctors announced they would walk out for five consecutive days from 7am on July 13.
Andrew Bailey, BoE governor, has already described current levels of wage growth as “unsustainable” this week, even as he attacked “companies seeking to rebuild profit margins” by raising prices.
The challenges facing the BoE were also cast into relief by figures on Friday that showed unexpected resilience in consumer demand, with retail sales rising 0.3 per cent between April and May — far above the 0.2 per cent contraction forecast by economists polled by Reuters.
The Office for National Statistics retail data underlined the impact of high inflation. In May, shoppers spent 17 per cent more than in February 2020, but bought 0.8 per cent fewer goods because of the rise in consumer goods prices.
The BoE is seeking to damp consumer spending power with higher borrowing costs, so that shoppers are unable to purchase goods and services or will refuse to pay higher prices.
But there was little sign in the retail spending data that the its actions to date have had much of an effect.
ONS senior statistician Heather Bovill said online retailers did “particularly well selling outdoor goods and summer clothes, as the sun began to shine”.
She added that sales in garden centres and DIY stores had also grown as the “good weather encouraged people to start home and garden improvements”. May also saw a return to growth for fuel sales after a dip in April.
The further rebound in retail sales volumes in May suggested “the recent resilience in economic activity hasn’t yet faded”, said Ruth Gregory, economist at Capital Economics.
But she noted that, with this week’s interest rate increase unlikely to be the last, it was “too soon to conclude the rebound in retail sales will be sustained and that the economy will avoid a recession”.
Friday’s figures also showed that overall economic activity eased in June. The UK composite PMI index, which tracks manufacturing and services activity, declined to a three-month low of 52.8.
This was below the 53.7 forecast by economists polled by Reuters, but still above the 50 mark indicating a majority of businesses reporting an expansion.
